How long can butter hold up farmgate prices

Published 27 June 17

High butter prices have been the dominate influence on rising farmgate prices in recent months. This leads to a question of whether the current high prices are sustainable. The answer will largely depend on what the main driving force is behind the rising prices - a longer-term change in demand or a short-term supply imbalance?

Overall, the causes behind higher import demand in 2016 seem pretty balanced between the short term supply impacts and the longer term demand impacts. With global milk supplies only expected to show moderate growth during 2017, it is unlikely that any market imbalance will be resolved quickly, a view supported by pricing of futures contracts.

In 2016, butter production in the key exporting regions* was flat, as reduced production in the US and Oceania negated higher production in the EU-28. During this time, wholesale prices in the EU and Oceania rose by 50% and 44% respectively, while import volumes from the main buying nations rose by 26%.

Annual change in imports by top importers (2016 v 2015)

Importers

tonnes

%

main causes for increased imports

Mexico

17

49%

consumption growth

USA

15

43%

gap between production growth and domestic demand

China

11

15%

consumption growth

Philippines

10

51%

consumption growth

Canada

9

58%

gap between production growth and domestic demand

Russia

8

8%

reduced supply; improved ability to import due to currency

Australia

7

30%

reduced production due to lower milk supplies

Total

77

26%

Source: Eurostat, UNComtrade, USDA, USDEC

The causes of the growth in butter imports from the key buying countries varied however. In some cases, imports were up due to a domestic shortage in supplies, while in others, it was more to do with rising consumption.

High domestic prices in the US drove an increase in imports in 2016. However, pressure from high stock levels has put downward pressure on domestic butter prices in the early part of 2017, making them more competitive on global markets. This is likely to limit the potential for further growth in US butter imports.

In Canada and Australia, import demand was primarily the result of insufficient supplies in the domestic market. Demand from these markets is likely to drop once any supply issues are resolved. In China, Mexico and the Philippines however, imports grew on the back of rising consumer and industrial demand, leading to a more permanent shift in demand, and one which is more likely to be maintained longer term.

*The majority (55-60%) of butter traded on global markets is supplied by three key regions – the EU-28, United States (US) and Oceania.